How Auto Insurance Rates Are Calculated
Like all businesses, an insurance company must cover its costs to stay viable. However, the difference with an insurance company is that they do not know how much the product will cost.
An insurance company collects premiums to pay for insurance claims, administration, and taxes.
Claims are the largest expense for an insurance company. They pay for bodily injury and vehicle repair/replacement. Claims are also the most unknown expense at the time of purchase, making them difficult to predict, which poses a large risk to the insurance company.
To cover the high risk and expense of claims, an insurance company:
- Considers the number of past claims when setting their base rate.
- Uses premiums collected from all their policyholders to pay for few who will make a claim.
- Invests the money collected from policyholders to reduce financial risk.
Insurance companies use a formula based on several identified risks to determine the price of your auto insurance policy. These risks include where you live, your age, your vehicle type, how much you drive, and any past insurance claims.
Base Rate
The base rate covers an insurance company’s expected claim, operating expenses, and reasonable profit to ensure the company’s viability.
Rating Factors
Insurance companies have access to a significant amount of data in order to accurately predict the risk of you making a claim. This includes personal characteristics like age, years licensed, and marital status.
Generally, they also focus on the following four types of rating factors:
1. How Much and Where You Drive
If you live or drive in a city, your rate is more likely to be higher due to the higher risk of vehicle theft or accidents. To learn more about insurance premiums and claims in your own community, visit our dashboard. Also, insurance companies determine risk by examining the number of kilometres driven. The more you drive, the more likely you are to be in an accident, so your insurance rate will likely increase.
Find the average premium in your postal code:
Premiums and claims in your community
2. Your Driving Record
Insurance companies use your driving record to determine how much of a risk you pose on the road. Generally, the better your driving record, the lower your insurance rate. For example, a driver with at-fault accidents poses a higher risk to an insurance company. Your rate may also increase if you have more than one traffic conviction in the last three years, such as speeding or careless driving.
When looking at your driving record, insurance companies consider:
- The number of years you have been licensed.
- The number of traffic convictions you have due to driving infractions, such as speeding tickets.
- The number of accidents you have had.
- If you have taken driver training.
3. Your Vehicle
Your vehicle’s make, model, and year affect your insurance rate. Insurance companies consider what the cost of replacing your vehicle would be if it were stolen or damaged. Your insurance rate might be lower if the vehicle model is statistically proven less likely to be stolen or involved in an accident. It also might be lower if the vehicle has better safety and handling features or is less costly to repair.
Generally, insurance rates are higher for newer vehicles and sports cars, but a vehicle’s safety features may help lower the price. The Insurance Bureau of Canada has a thorough list rating how expensive a vehicle is to insure.
4. Type and Amount of Coverage
The more coverage you have, the higher your insurance rate will be. You can customize your insurance to meet your needs by adding or removing specific types of coverage, such as collision or comprehensive. If you drive an older vehicle, you may want to remove collision coverage, or if you are leasing or financing your vehicle, you may be required to carry collision.
Surcharges and Discounts
An insurance company might apply a surcharge based on any accidents or convictions you may have.
You may also be eligible for several discounts or preferred rates depending on factors like:
- Bundling together your home and vehicle insurance
- Having an anti-theft system
- Using winter tires
- Having a membership in a professional association
- Being an alum of a university or college
Ask your insurance agent, broker, or direct writer about surcharges or discounts when seeking a quote.